Moody's Upgrades US Rating Outlook to Stable on Deficit Reduction

Moody's Investors Service has upgraded the US government bond rating outlook following stable economic growth achieved by the world's largest economy in recent months.

Credit rating agency Moody's bumped up the outlook to stable from negative and also affirmed the country's blue-chip triple-A rating.

The agency said the rating action reflects its assessment that "federal government's debt trajectory is on track to meet the criteria laid out in August 2011 for a return to a stable outlook."

"The growth of the US economy, which, while moderate, is currently progressing at a faster rate compared with several Aaa peers and has demonstrated a degree of resilience to major reductions in the growth of government spending," Moody's said in a statement.

"Therefore, the US government's debt-to-GDP ratio through 2018 will demonstrate a more pronounced decline than Moody's had anticipated when it assigned the negative outlook."

Government Deficit Reduction

The federal deficit, the difference between what the government collects in taxes and what it spends, has declined at a surprising rate and is expected to continually decline over the next few years.

For the first eight months of the budget year, the deficit totalled $509.8bn (£335bn, €389bn), down about $400bn from the same period last year, according to the US Treasury.

The government is on track to post its lowest annual deficit in five years.

The Congressional Budget Office (CBO) projects that deficit will decline to 4% of GDP in 2013 from 7% in 2012.

"This steep decline is being driven by previously enacted fiscal policy measures, including sequestration, as well as personal income and payroll tax increases at the beginning of the year, and a slowdown in the rate of increase in federal health care spending," Moody's said.

Moody's, however, noted that government deficits would increase once again over the long term in the absence of further government measures, and this could put the sovereign rating under pressure.

Economic Growth

Despite the fiscal tightening and slowdown observed in other major global economies, the US economy has been showing a resilient growth recently, Moody's said.

After growing 2.3% in 2012, the real GDP increased at an annual rate of 1.8% in the first quarter of 2013, helping a further reduction in debt-to-GDP ratio.

"Although the recession at the time of the crisis was severe, the US economy has recovered more strongly than most other large, advanced economies," Moody's said.

The IMF, CBO and the Blue Chip consensus forecasts put GDP growth at an average of 1.6% for 2013, 2.7% for 2014 and 3% or more for the following three years. The accelerated growth is backed by "a lower magnitude of fiscal tightening, continued strengthening of consumption and investment, and somewhat better international economic conditions," according to Moody's.

Fears of Rating Cut

The rating action by Moody's comes as analysts were afraid a rating cut to the US, following a rating cut by Standard & Poor's in August 2011.

S&P currently rates the country AA-plus with a stable outlook.

The affirmation by Moody's means the US sovereign rating could be safer now for years to come, according to analysts. Moody's also affirmed the Aaa senior ratings of Fannie Mae, Freddie Mac, the Federal Home Loan Banks and the Federal Farm Credit Banks, which are institutions directly linked to the government.

Last month, Fitch Ratings also affirmed the US sovereign AAA rating. However, the agency kept a negative outlook on the rating due to economic vulnerability on elevated debt levels.